Aggregate Economic System

[From Bill Powers (2004.02.17.1154 MST)]

Erling Jorgensen (2004.02.17.1235 EST) --

I an with you concerning starting economics over, although we should
remember what various people have been saying about babies and bathwater.
Also, it appears that economics is no more welcoming to starting over than
psychology has been: Not In My Back Yard.

I don't know exactly how you would proceed from your ideas toward modeling.
My approach is to stick strictly to concrete things -- transactions
involving goods (or services) and money, inventories, savings accounts, and
production lines. It's hard finding the right level of generality: too
detailed and you might as well just go around interviewing people and
looking at their books; too general and what you end up with could apply to
anything or its opposite. This problem comes up in engineering all the
time. It's just the nature of modeling.

It could be that we're talking about the same entities in different words.
Time will tell. I'll save your post for future reference -- not in the
archive, but more accessibly.

Best,

Bill P.

[From Erling Jorgensen (2004.02.17.1235 EST)]

Intention: My intention with this post is to try to integrate my own understandings
with some of the thoughts appearing on CSGnet over the past month or so, with regard
to economics.

As an aside, I am having difficulty with a lot of the rancor of late on CSGnet, and
I am not sure how best to control for my preferred perceptions in that regard. I am
going to try to disregard personalized comments, where possible, in assessing the
weight of different arguments; and if I can't, I'll probably make judgment-calls as
to whose opinions carry more credibility for me.

As background, so that my own "fruitful prejudices" are more visible, I am not an
economist. I did begin my undergraduate work wanting to go into developmental
economics, and began studying in that direction. My eventual path led elsewhere,
however, and I have ended up with a Ph.D. in psychology. I do not consider myself
stupid, but I do have difficulty understanding some of the definitions, explanations,
and logic of economic thought. In agreement with Martin Taylor's comments of
2004.02.02.0915 (09:38:58) that "there must be a better way," I am going to "have
a go myself" and try to reason out some of the fundamentals of economic transactions
as they make sense to me.

Bill Williams has recently highlighted Charlotte Bruun's comment that "Money flows
have their own logic." The most fruitful way for me to understand this is to realize
that the logic of an aggregate closed (or semi-closed) system is not necessarily the
same logic as the open loops (or uncompleted loops) that are the components of that
system. They are of different logical types, as Bateson would say.

Macro-economics has to do with a system in the aggregate. The most important
implication of this, I believe, is that there are not many entrances into the
system (i.e., like it or not, that's the field of action -- almost everything
that's needed is already there). And by the same token, there are very few if
any exits. This is also the hardest part to stay on top of, in thinking about a
system as a whole. What may be lost (permanently or by way of transaction) by
individual agents, is not necessarily lost by the aggregate system. I like the
metaphor of a mostly closed hydraulic system, with very few ports for entry or
exit. Open-loop transmission at any given nodule may change the direction of
flow but not necessarily the pressure of the composite system.

I find it helpful, when confused, to go back to first principles, although these
are not to my knowledge how an economist might phrase them. I'll capitalize notions
that I consider the organizing nodes on a system diagram. (I am not sure how to
actually create a diagram to send over CSGnet; attachments I get from others just
come up as long pages of encoded characters.) Hopefully, these system nodes might
offer ways to think about equations for the system. In this respect, this post
might tie into the Test Bed project, although I don't know whether my idiosyncratic
way of formulating things is a help or a hindrance.

It seems that all potential income comes from aggregate Capabilities to Act. That
suggests to me two outside sources of entry into an economic system. At their most
basic level, those Capabilities to Act come from combining Environmental Energy
(ultimately traceable to the sun) with the Negentropic Organization from Control
Systems. Those are the twin engines that drive everything else that's possible,
economic or otherwise. I think this is comparable to Martin Taylor's reading of
Bagno (see MT 2004.01.15.1043, & 2004.01.15.1250, as well as MT's website),
although Martin expounds on the implications with much more precision and detail.

The energy and organization stored in Capabilities to Act get partitioned into three
basic tracks, as I see it. There are Income-Generating Activities (what I'd like to
call Productivity, although I don't know if that runs afoul of other definitions in
the economic literature). There is also Expenditure Without Generating Income,
(which, if you follow Marilyn Waring in her book "If Women Counted", could be a
majority portion of any true economic reckoning). Finally there is the energy lost
as By-products & Wastage - I'm thinking almost of metabolic by-products here).

Where "Economics" proper starts, I believe, is with how best to understand and
partition the Income-Generating Activities (i.e., Productivity, if I can use that
term). In a system diagram, I would allow a "currency conversion" of Productivity
into Income. This simply says - (is this an example of an accounting identity?) -
that Income-Generating Activities quite naturally, and sooner or later, become Income.

That Income then gets partitioned in a couple of ways. One is comprised of all the
aggregate transactions that turn Income into Consumption. And that Consumption, in
the aggregate, is eventually reconverted into the Income-Generating Activities of
others in the closed system. There is a closed loop, in the aggregate, from
Productivity to Income to (among other places) Consumption and back to Productivity.
Again, these paths only have to do with Income-related activities. Expenditure
Without Generating Income was partitioned out earlier, as something else one could
do with the energy stored in Capabilities to Act.

The second track for Income is what I would call Holding for Future Use. I think
this is the kind of thing that economists might call "investment" or "savings," and
it is the closest I can come to understanding the so-called "accounting identity"
or definitional identity of those two terms. Basically there are only two things
you can do with income: consume it or hold it for future use. If the latter, then
it eventually circulates back into the aggregate Income node, by means of a closed
loop.

If I understand some of the talk a year ago about potential "leakage" from the
system (and TCP's thesis), it seems to me that the Holding for Future Use node
is one of the few places to locate any of that leakage. At best, it seems to me
that 'extended holding' that leads to 'delayed consumption' may temporarily remove
portions of the money flow from circulating in the more regular fashion, and so it
might be considered "temporary leakage." But in a closed system, it eventually
enters back into the regular currents, and so is not truly lost or leaked out of
the system.

There is an additional component, which I think has a more basic impact on the
system. Some Productivity is converted into Income by means of a side channel.
The function of this channel is essentially to take a loan out against Future
Productivity. That is one of the key roles of banks, I believe, to legitimate
and convert some part of Future Productivity into a present-day asset. So the
pivotal node on this side channel might be called Bank Creation of New Money,
which flows into the Income node by means of borrowing.

I cannot really tell if this channel is an outside point of entrance into the
closed system or not. My naming of this banking node suggests I think that it
is. There is a legal fiction introduced at this node, where the not-yet-available
energy of Future Productivity is treated as though it were a usable asset now. In
return for such a loan against the future, a promise is made that constrains some
of the degrees of freedom of future Consumption.

Calling such a path a "side channel," however, obscures an important point. This
is not simply a _second_ loop from Productivity to Income. In an aggregate system,
Future Productivity is already provided for. It is part of all Productivity in
the system. To give it a separate way to help constitute aggregate Income is
essentially to count it twice.

This is why I believe it is proper to call the banking node inserted into this
pathway Bank Creation of New Money. It is, in essence, an open loop entrance -
(borrowing from the future, as it were) - into a present-day closed system.

I realize some borrowing does come from those with extra income on hand, which
in the aggregate is from what I call the Holding for Future Use node. (This
portion is simply an alternate path for returning from Holding for Future Use
back to the Income node, and so it may alter the path equations but not the
dynamics of the overall system.) But there is also this somewhat artificial
infusion of new money - through such things as derivatives and the multiplier
effect (e.g., Rick Marken, 2004.01.24, 23:20:45) - as an open loop connection
into the aggregate system.

Conclusions

The following summary conclusions occur to me, from this whole way of thinking.

1. The main external inputs (i.e., ports of entry) into this whole system are
from Environmental Energy and Negentropic Organization, respectively. While
there is no way to measure these aggregate components, this conclusion keeps
reminding me that the economic system has to be fed from somewhere. These two
are the only "free lunch" around (with the possible exception of borrowing against
Future Productivity), because once inside the aggregate system, it is simply a
matter of a recirculating flow.

2. There is a systemic decision embedded in what Economics chooses to study.
Probably due to the need for a quantifiable currency in discussing these notions,
Economics is largely restricted (I believe) to what I have called Income-Generating
Activities. This leaves out what may be a very large nodule, which I have called
Expenditure Without Generating Income. Again, critical theorists such as Marilyn
Waring point out the sizeable human costs (to women in particular) and the societal
implications of not giving a true economic reckoning of this component.

3. By reducing the use of Income to the two basic channels of Consume it or Hold it
for Future Use, I think I understand how "savings" and "investment" can be assumed
to be identical. They are alternate names for income while it is being held. My
term suggests that most Income probably passes through this way-station of Holding
for Future Use; for instance, whenever a wallet is used, or whenever there is a gap
between pay day and shopping day. But such details of flow make no difference to
aggregate ("hydraulic") pressure in a closed system.

4. My initial thoughts as to equations are as follows. Income seems to be
constituted in two different ways. On the one hand, in my terminology, _Income is
comprised of _Consumption plus _Holding for _Future Use: i.e., I = C + HF.
I guess this would be comparable to the Keynesian equations, where C still stands
for consumption, Y stands for income (I think), and I stands for investment, or
in its alternate form S stands for savings: Y = C + I or Y = C + S.

On the other hand, in the system diagram I am considering, Income also consists of
Productivity plus borrowing. Borrowing has three sources, in the aggregate, two
of which are already covered by the above equation, (I = C + HF). One source is
the repayment of previous loans, included under Consumption. Another source is
those with excess income (whether called savings or investment), who are Holding
it for Future Use, and from whom money can be borrowed. The unique portion of
borrowing that is so far unaccounted for, is an advance crediting of part of
Future Productivity. Thus, _Income equals _Productivity plus a portion (k) of
_Future _Productivity, or I = P + k(FP).

I think this amounts to setting up two simultaneous equations, both of which
would have to hold true when solving for a given set of conditions. The upshot
of this way of thinking is not that "investment" and "savings" should be included
as separate terms in solving for aggregate Income. But rather, a portion of
Future Productivity is being added as present-day Income, through the legitimating
actions of banks, and this is essentially an open-loop source of new money.

5. I am not sure how time should be treated in the system I have spelled out. I
believe the common assumption may be that in an aggregate system (where everything
is supposed to be included), time can be ignored. And that may indeed be the
case with one of the nodes where I have included a reference to the future. The
Holding for Future Use node cycles back into the Income node, (either directly or
via a borrowing channel). In an aggregate system, it means part of Income loops
back to be part of Income again, albeit a bit later, and so in this case I believe
time could be effectively ignored.

The case is not so simple with the node representing Future Productivity. Because
of how banks are allowed to operate, Future Productivity has a separate influence
on current Income - that is, separate from the regular conversion of current
Productivity into current Income. This seems to play fast and loose with time
as a determiner in this system. And so, I think time would need to be included
as a distinct variable.

6. The result of conclusion #5 above, I believe, is that the equations should
probably be set up in terms of iterations, where the time factor is specified.
I believe this amounts to a shift - as Bill Powers discussed a while back - from
algebra to calculus. Algebraic equations, if true, always hold true, regardless
of conditions. Differential equations have to be solved for the same set of
conditions, where time is an integral part of the equations. And if I understand
the math properly, integrative equations by means of successive iterations can be
utilized to approximate the correct use of time in determining the results.

I'll end with my semi-standard disclaimer. I don't know if it is helpful to anyone
else, to boil things down to such basic factors - (what I am calling the organizing
nodes of an aggregate system diagram). But for me, it helps to track what part of
the overall system is being discussed, when some of the more technical concepts start
flying. I finally realized, if I was going to get any further with understanding
this aggregate macro-economic territory, I had to start with a simple enough map
that worked for me.

All the best,
        Erling

[
Bill Williams 17 February 2004 1:50 PM CST]

Erling, after reading through your post, for a first time, it is evident
that you bring to the discussion a quite sophisticated array of conceptual
tools. Bill Powers also brings a quite sophisticated array of tools to the
problem. But, the problem is, at least in my opinion, far more difficult
than is usually supposed. Historically I think there is quite a lot of
evidence to support an assesssment that theoretical economics is a difficult
field.

So, if the problem of economic theory is difficult, what would best the be
the best path along which to approach the problem? My suggestion is one
borrowed from chess. However, capable one may be, in chess one never
becomes a highly ranked player without studying the game. I know of no
exceptions to this rule. Now, chess is comparatively free from the sorts of
pathological professionalism characteristic of economics. But, the problems
involved are in some ways quite similar. There is even a novel by Herman
Hesse _The Glass Bead Game_ which many economists read as containing an
ironic commentary on the question of economic theory My reading of _the
Glass Bead Game is perhaps much more literal than Hesse intended, and he
might disapprove of my drawing a comparison between economic theory and
chess. But, I think that considering economic theory in this way provides
some useful points of comparison and contrast.

Bill Powers has for years had this desire to create his own economic theory.
I've managed for the most part over the years managed to stay clear of this
project. However, recently when Powers' effort to make use of contemporary
control theory methods collapsed, he decided to devote his energies to this
Test Bed project.
And, he wanted my help in furthering the project.

If we apply the analogy that economic theory is like chess, what Powers
wanted from me was " information."
Williams, Powers supposed would handle details-- like how the pawns and
knights and all moved on the board. While Powers supplied the fundamental
theory according to which the details would be organized. But, Powers was
also going to do the coding of the system into a computer program. I though
for a time that there was some chance that the project might actually work.
After all, I don't have any complaint about the way control theory is
formulated. However, when Powers attempted to do the high theory issues,
rather than approach the questions in terms of a control theory informed
context, Powers instead attempted to approach the issues in terms of a very
simplistic mechanistic realism. And, this generated a basic difficulty--
because the monetary aspect of economic organization is not fundamentally a
matter of the flow of a substance. Rather monetary economics is a domain of
value. And, value described in monetary terms is an issue that depends upon
a system of accounting. And, accounting is inherently a social process,
with a logic of its own. It isn't an arbitrary logic, at least not
entirely, and it is a logic that is not a matter of physical substance and
the transport of, or the transformation of physical substances.

Now my rambling on about economics and chess may seem entirely beside the
point-- it certainly exasperates Bill Powers. But, I notice that you
consider Bruun's assertion that more or less "Money has its own logic."
However, later you proceed to use the analogy of a hydraulic line to
organize your thoughts. This is I am convinced an eclectic approach that
leads to frustration. I think it would be better to pursue consistently
either Bruun's assertion that money is a unique phenomena, or stick to a
quasi-mechanistic analogy. While I have some criticisms of Bruun's
approach, I really do like the way that she has explained the characteristic
traits of a macro-economy.

In my view what is required is a statement of the macro-economic process in
terms of an educational system that
is identical in principle to the one that Powers expounded in the Appendix
to his BCP. Unfortunately, I don't suppose the details make much if any
difference, Powers discarded the fundamentals characteristic of his
modeling approach when he set out to revolutionize economics. I attribute
this to his being caught up in a conflicted relationship with his father.
But, that isn't an issue that has any prospect of being resolved.

My suggestion to you would be-- why not consider what Bruun had to say
about these issues in her dissertation-- particularly the section where she
expounds the principles involved in a macroeconomy. In my experience her
exposition is as good as anything that I have seen.

Beyond that, while I haven't felt that I should intrude-- since it was Bill
Powers who went to the trouble of finding Bruun's work, I don't see why we
shouldn't involve, assuming the professor would be willing to become
involved, her in the discussions.

Why struggle to re-invent the wheel?

As Rick Marken recently said, "Economics isn't for the faint hearted." But,
it doesn't necessarily have to be carried on as a brawl. In my view the
"rancor" that you mention that has sometimes characterized the various
economics threads has had as its principle source Bill Powers completely
ridiculous assertion that Keynes was some sort of representative for the
business interests. And, further his assertion that if you don't add things
up the way he adds things up, then you don't know what it means to count.

Unexpected things keep happening, and I regard your post as a "contribution"
that might be a basis for transforming the status of the on-going discussion
of economic theory.

Cordially

Bill Williams

···

----- Original Message -----
From: "Erling Jorgensen" <ejorgensen@RIVERBENDCMHC.ORG>
To: <CSGNET@listserv.uiuc.edu>
Sent: Tuesday, February 17, 2004 11:35 AM
Subject: Aggregate Economic System

[From Erling Jorgensen (2004.02.17.1235 EST)]

Intention: My intention with this post is to try to integrate my own

understandings

with some of the thoughts appearing on CSGnet over the past month or so,

with regard

to economics.

As an aside, I am having difficulty with a lot of the rancor of late on

CSGnet, and

I am not sure how best to control for my preferred perceptions in that

regard. I am

going to try to disregard personalized comments, where possible, in

assessing the

weight of different arguments; and if I can't, I'll probably make

judgment-calls as

to whose opinions carry more credibility for me.

As background, so that my own "fruitful prejudices" are more visible, I am

not an

economist. I did begin my undergraduate work wanting to go into

developmental

economics, and began studying in that direction. My eventual path led

elsewhere,

however, and I have ended up with a Ph.D. in psychology. I do not

consider myself

stupid, but I do have difficulty understanding some of the definitions,

explanations,

and logic of economic thought. In agreement with Martin Taylor's comments

of

2004.02.02.0915 (09:38:58) that "there must be a better way," I am going

to "have

a go myself" and try to reason out some of the fundamentals of economic

transactions

as they make sense to me.

Bill Williams has recently highlighted Charlotte Bruun's comment that

"Money flows

have their own logic." The most fruitful way for me to understand this is

to realize

that the logic of an aggregate closed (or semi-closed) system is not

necessarily the

same logic as the open loops (or uncompleted loops) that are the

components of that

system. They are of different logical types, as Bateson would say.

Macro-economics has to do with a system in the aggregate. The most

important

implication of this, I believe, is that there are not many entrances into

the

system (i.e., like it or not, that's the field of action -- almost

everything

that's needed is already there). And by the same token, there are very

few if

any exits. This is also the hardest part to stay on top of, in thinking

about a

system as a whole. What may be lost (permanently or by way of

transaction) by

individual agents, is not necessarily lost by the aggregate system. I

like the

metaphor of a mostly closed hydraulic system, with very few ports for

entry or

exit. Open-loop transmission at any given nodule may change the direction

of

flow but not necessarily the pressure of the composite system.

I find it helpful, when confused, to go back to first principles, although

these

are not to my knowledge how an economist might phrase them. I'll

capitalize notions

that I consider the organizing nodes on a system diagram. (I am not sure

how to

actually create a diagram to send over CSGnet; attachments I get from

others just

come up as long pages of encoded characters.) Hopefully, these system

nodes might

offer ways to think about equations for the system. In this respect, this

post

might tie into the Test Bed project, although I don't know whether my

idiosyncratic

way of formulating things is a help or a hindrance.

It seems that all potential income comes from aggregate Capabilities to

Act. That

suggests to me two outside sources of entry into an economic system. At

their most

basic level, those Capabilities to Act come from combining Environmental

Energy

(ultimately traceable to the sun) with the Negentropic Organization from

Control

Systems. Those are the twin engines that drive everything else that's

possible,

economic or otherwise. I think this is comparable to Martin Taylor's

reading of

Bagno (see MT 2004.01.15.1043, & 2004.01.15.1250, as well as MT's

website),

although Martin expounds on the implications with much more precision and

detail.

The energy and organization stored in Capabilities to Act get partitioned

into three

basic tracks, as I see it. There are Income-Generating Activities (what

I'd like to

call Productivity, although I don't know if that runs afoul of other

definitions in

the economic literature). There is also Expenditure Without Generating

Income,

(which, if you follow Marilyn Waring in her book "If Women Counted", could

be aBill Williams 17 February 2004 1:50 PM CST]

Erling, after reading through your post, for a first time, it is evident
that you bring to the discussion a quite sophisticated array of conceptual
tools. Bill Powers also brings a quite sophisticated array of tools to the
problem. But, the problem is, at least in my opinion, far more difficult
than is usually supposed. Historically I think there is quite a lot of
evidence to support an assesssment that theoretical economics is a difficult
field.

So, if the problem of economic theory is difficult, what would best the be
the best path along which to approach the problem? My suggestion is one
borrowed from chess. However, capable one may be, in chess one never
becomes a highly ranked player without studying the game. I know of no
exceptions to this rule. Now, chess is comparatively free from the sorts of
pathological professionalism characteristic of economics. But, the problems
involved are in some ways quite similar. There is even a novel by Herman
Hesse _The Glass Bead Game_ which many economists read as containing an
ironic commentary on the question of economic theory My reading of _the
Glass Bead Game is perhaps much more literal than Hesse intended, and he
might disapprove of my drawing a comparison between economic theory and
chess. But, I think that considering economic theory in this way provides
some useful points of comparison and contrast.

Bill Powers has for years had this desire to create his own economic theory.
I've managed for the most part over the years managed to stay clear of this
project. However, recently when Powers' effort to make use of contemporary
control theory methods collapsed, he decided to devote his energies to this
Test Bed project.
And, he wanted my help in furthering the project.

If we apply the analogy that economic theory is like chess, what Powers
wanted from me was " information."
Williams, Powers supposed would handle details-- like how the pawns and
knights and all moved on the board. While Powers supplied the fundamental
theory according to which the details would be organized. But, Powers was
also going to do the coding of the system into a computer program. I though
for a time that there was some chance that the project might actually work.
After all, I don't have any complaint about the way control theory is
formulated. However, when Powers attempted to do the high theory issues,
rather than approach the questions in terms of a control theory informed
context, Powers instead attempted to approach the issues in terms of a very
simplistic mechanistic realism. And, this generated a basic difficulty--
because the monetary aspect of economic organization is not fundamentally a
matter of the flow of a substance. Rather monetary economics is a domain of
value. And, value described in monetary terms is an issue that depends upon
a system of accounting. And, accounting is inherently a social process,
with a logic of its own. It isn't an arbitrary logic, at least not
entirely, and it is a logic that is not a matter of physical substance and
the transport of, or the transformation of physical substances.

Now my rambling on about economics and chess may seem entirely beside the
point-- it certainly exasperates Bill Powers. But, I notice that you
consider Bruun's assertion that more or less "Money has its own logic."
However, later you proceed to use the analogy of a hydraulic line to
organize your thoughts. This is I am convinced an eclectic approach that
leads to frustration. I think it would be better to pursue consistently
either Bruun's assertion that money is a unique phenomena, or stick to a
quasi-mechanistic analogy. While I have some criticisms of Bruun's
approach, I really do like the way that she has explained the characteristic
traits of a macro-economy.

In my view what is required is a statement of the macro-economic process in
terms of an educational system that
is identical in principle to the one that Powers expounded in the Appendix
to his BCP. Unfortunately, I don't suppose the details make much if any
difference, Powers discarded the fundamentals characteristic of his
modeling approach when he set out to revolutionize economics. I attribute
this to his being caught up in a conflicted relationship with his father.
But, that isn't an issue that has any prospect of being resolved.

majority portion of any true economic reckoning). Finally there is the

energy lost

as By-products & Wastage - I'm thinking almost of metabolic by-products

here).

Where "Economics" proper starts, I believe, is with how best to understand

and

partition the Income-Generating Activities (i.e., Productivity, if I can

use that

term). In a system diagram, I would allow a "currency conversion" of

Productivity

into Income. This simply says - (is this an example of an accounting

identity?) -

that Income-Generating Activities quite naturally, and sooner or later,

become Income.

That Income then gets partitioned in a couple of ways. One is comprised

of all the

aggregate transactions that turn Income into Consumption. And that

Consumption, in

the aggregate, is eventually reconverted into the Income-Generating

Activities of

others in the closed system. There is a closed loop, in the aggregate,

from

Productivity to Income to (among other places) Consumption and back to

Productivity.

Again, these paths only have to do with Income-related activities.

Expenditure

Without Generating Income was partitioned out earlier, as something else

one could

do with the energy stored in Capabilities to Act.

The second track for Income is what I would call Holding for Future Use.

I think

this is the kind of thing that economists might call "investment" or

"savings," and

it is the closest I can come to understanding the so-called "accounting

identity"

or definitional identity of those two terms. Basically there are only two

things

you can do with income: consume it or hold it for future use. If the

latter, then

it eventually circulates back into the aggregate Income node, by means of

a closed

loop.

If I understand some of the talk a year ago about potential "leakage" from

the

system (and TCP's thesis), it seems to me that the Holding for Future Use

node

is one of the few places to locate any of that leakage. At best, it seems

to me

that 'extended holding' that leads to 'delayed consumption' may

temporarily remove

portions of the money flow from circulating in the more regular fashion,

and so it

might be considered "temporary leakage." But in a closed system, it

eventually

enters back into the regular currents, and so is not truly lost or leaked

out of

the system.

There is an additional component, which I think has a more basic impact on

the

system. Some Productivity is converted into Income by means of a side

channel.

The function of this channel is essentially to take a loan out against

Future

Productivity. That is one of the key roles of banks, I believe, to

legitimate

and convert some part of Future Productivity into a present-day asset. So

the

pivotal node on this side channel might be called Bank Creation of New

Money,

which flows into the Income node by means of borrowing.

I cannot really tell if this channel is an outside point of entrance into

the

closed system or not. My naming of this banking node suggests I think

that it

is. There is a legal fiction introduced at this node, where the

not-yet-available

energy of Future Productivity is treated as though it were a usable asset

now. In

return for such a loan against the future, a promise is made that

constrains some

of the degrees of freedom of future Consumption.

Calling such a path a "side channel," however, obscures an important

point. This

is not simply a _second_ loop from Productivity to Income. In an

aggregate system,

Future Productivity is already provided for. It is part of all

Productivity in

the system. To give it a separate way to help constitute aggregate Income

is

essentially to count it twice.

This is why I believe it is proper to call the banking node inserted into

this

pathway Bank Creation of New Money. It is, in essence, an open loop

entrance -

(borrowing from the future, as it were) - into a present-day closed

system.

I realize some borrowing does come from those with extra income on hand,

which

in the aggregate is from what I call the Holding for Future Use node.

(This

portion is simply an alternate path for returning from Holding for Future

Use

back to the Income node, and so it may alter the path equations but not

the

dynamics of the overall system.) But there is also this somewhat

artificial

infusion of new money - through such things as derivatives and the

multiplier

effect (e.g., Rick Marken, 2004.01.24, 23:20:45) - as an open loop

connection

into the aggregate system.

Conclusions

The following summary conclusions occur to me, from this whole way of

thinking.

1. The main external inputs (i.e., ports of entry) into this whole system

are

from Environmental Energy and Negentropic Organization, respectively.

While

there is no way to measure these aggregate components, this conclusion

keeps

reminding me that the economic system has to be fed from somewhere. These

two

are the only "free lunch" around (with the possible exception of borrowing

against

Future Productivity), because once inside the aggregate system, it is

simply a

matter of a recirculating flow.

2. There is a systemic decision embedded in what Economics chooses to

study.

Probably due to the need for a quantifiable currency in discussing these

notions,

Economics is largely restricted (I believe) to what I have called

Income-Generating

Activities. This leaves out what may be a very large nodule, which I have

called

Expenditure Without Generating Income. Again, critical theorists such as

Marilyn

Waring point out the sizeable human costs (to women in particular) and the

societal

implications of not giving a true economic reckoning of this component.

3. By reducing the use of Income to the two basic channels of Consume it

or Hold it

for Future Use, I think I understand how "savings" and "investment" can be

assumed

to be identical. They are alternate names for income while it is being

held. My

term suggests that most Income probably passes through this way-station of

Holding

for Future Use; for instance, whenever a wallet is used, or whenever there

is a gap

between pay day and shopping day. But such details of flow make no

difference to

aggregate ("hydraulic") pressure in a closed system.

4. My initial thoughts as to equations are as follows. Income seems to

be

constituted in two different ways. On the one hand, in my terminology,

_Income is

comprised of _Consumption plus _Holding for _Future Use: i.e., I = C + HF.
I guess this would be comparable to the Keynesian equations, where C still

stands

for consumption, Y stands for income (I think), and I stands for

investment, or

in its alternate form S stands for savings: Y = C + I or Y = C + S.

On the other hand, in the system diagram I am considering, Income also

consists of

Productivity plus borrowing. Borrowing has three sources, in the

aggregate, two

of which are already covered by the above equation, (I = C + HF). One

source is

the repayment of previous loans, included under Consumption. Another

source is

those with excess income (whether called savings or investment), who are

Holding

it for Future Use, and from whom money can be borrowed. The unique

portion of

borrowing that is so far unaccounted for, is an advance crediting of part

of

Future Productivity. Thus, _Income equals _Productivity plus a portion

(k) of

_Future _Productivity, or I = P + k(FP).

I think this amounts to setting up two simultaneous equations, both of

which

would have to hold true when solving for a given set of conditions. The

upshot

of this way of thinking is not that "investment" and "savings" should be

included

as separate terms in solving for aggregate Income. But rather, a portion

of

Future Productivity is being added as present-day Income, through the

legitimating

actions of banks, and this is essentially an open-loop source of new

money.

5. I am not sure how time should be treated in the system I have spelled

out. I

believe the common assumption may be that in an aggregate system (where

everything

is supposed to be included), time can be ignored. And that may indeed be

the

case with one of the nodes where I have included a reference to the

future. The

Holding for Future Use node cycles back into the Income node, (either

directly or

via a borrowing channel). In an aggregate system, it means part of Income

loops

back to be part of Income again, albeit a bit later, and so in this case I

believe

time could be effectively ignored.

The case is not so simple with the node representing Future Productivity.

Because

of how banks are allowed to operate, Future Productivity has a separate

influence

on current Income - that is, separate from the regular conversion of

current

Productivity into current Income. This seems to play fast and loose with

time

as a determiner in this system. And so, I think time would need to be

included

as a distinct variable.

6. The result of conclusion #5 above, I believe, is that the equations

should

probably be set up in terms of iterations, where the time factor is

specified.

I believe this amounts to a shift - as Bill Powers discussed a while

back - from

algebra to calculus. Algebraic equations, if true, always hold true,

regardless

of conditions. Differential equations have to be solved for the same set

of

conditions, where time is an integral part of the equations. And if I

understand

the math properly, integrative equations by means of successive iterations

can be

utilized to approximate the correct use of time in determining the

results.

I'll end with my semi-standard disclaimer. I don't know if it is helpful

to anyone

else, to boil things down to such basic factors - (what I am calling the

organizing

nodes of an aggregate system diagram). But for me, it helps to track what

part of

the overall system is being discussed, when some of the more technical

concepts start

flying. I finally realized, if I was going to get any further with

understanding

this aggregate macro-economic territory, I had to start with a simple

enough map

that worked for me.

All the best,
        Erling

[From Erling Jorgensen (2004.02.17.2115 EST)]

Bill Williams 17 February 2004 1:50 PM CST

I am looking further at Charlotte Bruun's work, as you suggested. It will take some digesting,
but I agree she is a very clear and compelling writer.

In that respect, I am focusing on the notion you raise that -

the monetary aspect of economic organization is not fundamentally a
matter of the flow of a substance. Rather monetary economics is a domain of
value. And, value described in monetary terms is an issue that depends upon
a system of accounting. And, accounting is inherently a social process,
with a logic of its own.

Bruun seems to be the most useful in unpacking what I think you mean here. So I will
look carefully at what she says, particularly in her dissertation about the nature of money
and its logical structure.

The notion of how money has value seems to be at the heart of it, and Bruun has
obviously examined the matter in detail. In terms of the system diagram I tried to
describe, I wonder if such issues revolve around the (not-so-simple) "currency conversion"
between Productivity and Income - that is, between various Income-Generating
Activities and how they are to be valued. I didn't raise it in my post, but that did occur
to me as one place where the units of measurement might have been changing (e.g.,
from "energy" or some such thing, into "money") and not being specified.

I will ponder further whether the "hydraulics" metaphor is appropriate for the logic of
a monetary economy. Where I think the metaphor can still be helpful is as a constant
reminder of the difference - as in, different logical levels -- between a closed-system
analysis, versus an open-loop analysis of one of its components.

I will say, in passing, that my working appraisals of the modeling approach Bill Powers
is following are not the same as yours. Bruun herself lays out a somewhat similar
agenda: lay out the chief macroeconomic constraints and implications, embody the
microeconomics in agent-based computations and/or decision rules, and then run
computer simulations to test and see aspects previously hidden by the complexity.

I do agree that some kind of marriage between Powers' control systems modeling and
Bruun's economic modeling would be very valuable.

All the best,
        Erling

From Bill Williams 17 February 2004 9:30 PM CST]

> [From Erling Jorgensen (2004.02.17.2115 EST)]
>
> >Bill Williams 17 February 2004 1:50 PM CST
>
> I am looking further at Charlotte Bruun's work, as you suggested. It

will

take some digesting,

I would expect that this might be the case. There may be some things that
she approaches in a way that makes things more difficult than is really
necessary. Her treatment of the transactions "period" seems to me, while
interesting, more complex than is required. And, the 90 some pages of Pascal
code is not something that I like to think about.

> but I agree she is a very clear and compelling writer.
>
> In that respect, I am focusing on the notion you raise that -
>
> >the monetary aspect of economic organization is not fundamentally a
> >matter of the flow of a substance. Rather monetary economics is a

domain

of
> >value. And, value described in monetary terms is an issue that depends
upon
> >a system of accounting. And, accounting is inherently a social

process,

> >with a logic of its own.
>
> Bruun seems to be the most useful in unpacking what I think you mean

here.

Sorry for not being more directly informative. There are problems involved
that in one sense ought to be communicable in concise terms, but it never
seems to work out that communication actually takes place using the concise
terms.

I will be very much interested in your impression after you have time, as
you say, to digest her approach. There really is quite a bit of beef to
chew on.

So I will
> look carefully at what she says, particularly in her dissertation about
the nature of money
> and its logical structure.

Again, I will be most interested in your reaction.

>
> The notion of how money has value seems to be at the heart of it, and
Bruun has
> obviously examined the matter in detail.

Actually, quite of lot of what she has to say, is in some sense common
knowledge, at least in some circles, but her presentation puts a lot of
stuff together in a compact argument that may not be duplicated elsewhere.

In terms of the system diagram I tried to
> describe, I wonder if such issues revolve around the (not-so-simple)
"currency conversion"
> between Productivity and Income - that is, between various
Income-Generating
> Activities and how they are to be valued. I didn't raise it in my post,
but that did occur
> to me as one place where the units of measurement might have been

changing

(e.g.,
> from "energy" or some such thing, into "money") and not being specified.

Bruun has some very interesting things to say about this issue. Most people
shy away considering the problem, but she is quite candid.

>
> I will ponder further whether the "hydraulics" metaphor is appropriate

for

the logic of
> a monetary economy. Where I think the metaphor can still be helpful is

as

a constant
> reminder of the difference - as in, different logical levels -- between

a

closed-system
> analysis, versus an open-loop analysis of one of its components.

If you introduce some restrictions into the analysis the "hydraulic" analogy
can I suppose be useful. A number of actual "hydraulic" analog models were
built. Not really very useful or productive, but they did I guess more or
less "work." The " hydraulic" conception does I suppose have value in
shifting thinking away from a naively sequential analysis of "Where is the
money going?" You have to be rather sophisticated and careful to use a
sequential analysis and avoid mistakes.

>
> I will say, in passing, that my working appraisals of the modeling
approach Bill Powers
> is following are not the same as yours.

Ok. This might prove to be an interesting point of discussion. It seems to
me that there may be two or more approaches that Powers is taking. So,
differences may involve which one you or I consider primary.

Bruun herself lays out a somewhat similar
> agenda: lay out the chief macroeconomic constraints and implications,
embody the
> microeconomics in agent-based computations and/or decision rules, and

then

run
> computer simulations to test and see aspects previously hidden by the
complexity.

I regard the issue of how the macroeconomic constraints are specified is
absolutely crucial. And, from what I have read, Bruun appears to set out
these specification correctly.

  There is also an issue in terms of causation. Is
investment an independent variable and savings the passive side of the
identity. Or, is savings prior in time and investment constrained by prior
savings? Really tricky issues here. The Post-Keynesians aside, my sense is
that nearly everyone has gone back to the pre-Keynesian conception-- that
savings is the prior, and independent variable and investment the dependent
and subsequent term.

Looking forward to a discussion following your "digestion" of Bruun's
dissertation. None of my business really, but there is quite a bit of
effort required to become familiar with this stuff. I wonder," What sort of
reference level prompts this activity?" Like I say -- none of my business.

Bill Williams

[Martin Taylor 2004.02.18.1649]

[From Bill Powers (2004.02.17.1154 MST)]

Erling Jorgensen (2004.02.17.1235 EST) --

I an with you concerning starting economics over, although we should
remember what various people have been saying about babies and bathwater.
Also, it appears that economics is no more welcoming to starting over than
psychology has been: Not In My Back Yard.

I wouldn't single out one "science" over another in that respect. The
closer a science is to being able to predict numerically the results
of experiments, the more open it is to ideas that could be tested
agains established ideas through the use of data. Consider the
difference between the acceptance of Continental Drift when it was
first proposed based mainly on the congruence of Africo-European and
American shorelines and later when the stripes of magnetic reversals
were discovered.

I think in the world of economics, one has to distinguish between
"Economics" and "economics". The former has what Bill W likes to call
an "axiological" basis (meaning, so far as I can gather, that it is a
branch of pure maths based on finding out where logical theorems
derived from the axioms can get you). The latter is a messy and
confused approach to describing, and with luck predicting, what is
going to happen to the well-being of people if certain fiscal and
monetary policies are followed by the state or by institutions and
individuals.

If the axioms are good analogues of something in the real world (as
are Euclid's axioms for many purposes), then Economics can be a good
guide for economics. But I rather think that the contrary is the case.

If I'm right, then there are two kinds of "starting over". One is the
discovery of a different set of axioms on which to found a new
Economics, while the other is the engineering-modelling approach
(economics) of finding models that describe from new viewpoints what
actually does happen in the real world, and perhaps working back from
the models to "Natural Laws" of economics (and maybe better axioms of
a new Economics).

Whether either kind of "starting over" is likely to make inroads into
Economics is rather like asking a priori whether Lobachevskian
geometry will make inroads into Euclidean. It won't. It's a different
beast. A more useful question is whether following policies suggested
by either a new Economics or a new economics will make life better
for most people, and that depends on being as politically persuasive
as are the proponents of the disastrous Economics that currently are
so powerful.

I don't know exactly how you would proceed from your ideas toward modeling.
My approach is to stick strictly to concrete things -- transactions
involving goods (or services) and money, inventories, savings accounts, and
production lines.

In other words, you are working with "economics", meaning there's no
point in arguing about "Economics."

I think my approach has been the opposite. In following Bagno, I
follow the logic induced by a introducing into Economics a new axiom
based on the more general laws of Nature. Doing so constrains the
applicability of the logical consequences of other Economic axioms to
the real world. But it's still a mathematical game, albeit one in
which at least one axiom has a strong relation to physical reality.

Martin

[From Bill Williams 17 February 2004 6:00 PM CST]

[Martin Taylor 2004.02.18.1649]

>[From Bill Powers (2004.02.17.1154 MST)]
>
>Erling Jorgensen (2004.02.17.1235 EST) --
>
>I an with you concerning starting economics over, although we should
>remember what various people have been saying about babies and bathwater.
>Also, it appears that economics is no more welcoming to starting over

than

>psychology has been: Not In My Back Yard.

I wouldn't single out one "science" over another in that respect. The
closer a science is to being able to predict numerically the results
of experiments, the more open it is to ideas that could be tested
agains established ideas through the use of data. Consider the
difference between the acceptance of Continental Drift when it was
first proposed based mainly on the congruence of Africo-European and
American shorelines and later when the stripes of magnetic reversals
were discovered.

Martin, this is an excellent example. As it happens we use it frequently in
the methodology seminar to illustrate the role of experiment/empirical
measurement in the choice between theories.

I think in the world of economics, one has to distinguish between
"Economics" and "economics". The former has what Bill W likes to call
an "axiological" basis (meaning, so far as I can gather, that it is a
branch of pure maths based on finding out where logical theorems
derived from the axioms can get you). The latter is a messy and
confused approach to describing, and with luck predicting, what is
going to happen to the well-being of people if certain fiscal and
monetary policies are followed by the state or by institutions and
individuals.

No Martin. You are getting it all confused. Not that it isn't confused
enough to start with. You aren't even close to the target. So, you can
fire all lthe shells you want to in this direction, and it isn't going to
scratch my hide.

If the axioms are good analogues of something in the real world (as
are Euclid's axioms for many purposes), then Economics can be a good
guide for economics. But I rather think that the contrary is the case.

If I'm right, then there are two kinds of "starting over". One is the
discovery of a different set of axioms on which to found a new
Economics, while the other is the engineering-modelling approach
(economics) of finding models that describe from new viewpoints what
actually does happen in the real world, and perhaps working back from
the models to "Natural Laws" of economics (and maybe better axioms of
a new Economics).

This is a false distinction. And, bringing back "natural laws" is one of
those "giant leaps in the wrong direction."

Whether either kind of "starting over" is likely to make inroads into
Economics is rather like asking a priori whether Lobachevskian
geometry will make inroads into Euclidean. It won't. It's a different
beast. A more useful question is whether following policies suggested
by either a new Economics or a new economics will make life better
for most people, and that depends on being as politically persuasive
as are the proponents of the disastrous Economics that currently are
so powerful.

Since, as they say, "Money doesn't talk, it shouts." this is going to be a
tough road to travel.

>I don't know exactly how you would proceed from your ideas toward

modeling.

>My approach is to stick strictly to concrete things -- transactions
>involving goods (or services) and money, inventories, savings accounts,

and

>production lines.

In other words, you are working with "economics", meaning there's no
point in arguing about "Economics."

I'm warning you, travel this direction, and you end up in well-- bedlam.

I think my approach has been the opposite. In following Bagno, I
follow the logic induced by a introducing into Economics a new axiom
based on the more general laws of Nature. Doing so constrains the
applicability of the logical consequences of other Economic axioms to
the real world. But it's still a mathematical game, albeit one in
which at least one axiom has a strong relation to physical reality.

One more time, economics is not about physical reality.

Understandings _about_ physical, and biological realities may be helpful,
and perhaps even essential, but the consistent mistake that people outside
economics seem to consistently make, is to think that they can avoid
thinking about value. Sort of like the
people from Descartes to Watson who thought they could build a psychology--
without thinking about behavior. Make it all simple and concrete. Talk
about waste of time!

I could borrow similar phrases from Bill Powers' lexicon, but it would be
offensive, and heaven forbid that people should be offended.

Fortunately we have the good Professor Bruun to help us out. Bill Powers
can present his startling innovation, something no mere economists could
have ever thought of Y = C + S + I.

I hear Ed Ford is going to be going to Kangaroo land soon. Perhaps this
time he will return with a pair of the Princess Lady Diana sunglasses.

Martin, can I send you a copy of Steve Keen's book? If you had a copy of
Keen's book there wouldn't be any need to puzzle over Kant's first critique.

Bill Williams

[Martin Taylor [2004.02.19.1003]

[From Erling Jorgensen (2004.02.17.1235 EST)]

Intention: My intention with this post is to try to integrate my
own understandings
with some of the thoughts appearing on CSGnet over the past month or
so, with regard
to economics.
Macro-economics has to do with a system in the aggregate. The most important
implication of this, I believe, is that there are not many entrances into the
system (i.e., like it or not, that's the field of action -- almost everything
that's needed is already there). And by the same token, there are
very few if
any exits. This is also the hardest part to stay on top of, in
thinking about a
system as a whole. What may be lost (permanently or by way of transaction) by
individual agents, is not necessarily lost by the aggregate system.
I like the
metaphor of a mostly closed hydraulic system, with very few ports for entry or
exit. Open-loop transmission at any given nodule may change the direction of
flow but not necessarily the pressure of the composite system.

I'm afraid it could be a misleading metaphor. I think that what is
lost by individual agents is indeed lost to the system (I don't mean
situations like robbery, but entropic loss in transactions). A better
metaphor might be the flow of heat, since there is (on average) loss
in every transformation and with the simple passage of time. That
loss is, I think, critical in understanding economics, whether macro
or micro. Thinking of the system as being entropically closed is, I
think, at the heart of big policy mistakes that affect all of us.

As you say...

It seems that all potential income comes from aggregate Capabilities
to Act. That
suggests to me two outside sources of entry into an economic system.
At their most
basic level, those Capabilities to Act come from combining
Environmental Energy
(ultimately traceable to the sun) with the Negentropic Organization
from Control
Systems. Those are the twin engines that drive everything else
that's possible,
economic or otherwise.

...

There is an additional component, which I think has a more basic impact on the
system. Some Productivity is converted into Income by means of a
side channel.
The function of this channel is essentially to take a loan out against Future
Productivity. That is one of the key roles of banks, I believe, to legitimate
and convert some part of Future Productivity into a present-day asset. So the
pivotal node on this side channel might be called Bank Creation of New Money,
which flows into the Income node by means of borrowing.

A crucial point, money being the inverse flow from productivity.

I believe it is proper to call the banking node inserted into this
pathway Bank Creation of New Money. It is, in essence, an open loop
entrance -
(borrowing from the future, as it were) - into a present-day closed system.

Yes. It doesn't have to be Banks, though. Any loan will do, and any
defaulted loan or bankruptcy is the destruction of money. It's
destructive in two ways. Not only does the loan-holder not have the
money in hand, but also future loans are made with less certainty of
repayment as the probability of default increases. That reduces the
value of current money.

Conclusions

The following summary conclusions occur to me, from this whole way
of thinking.

1. The main external inputs (i.e., ports of entry) into this whole system are
from Environmental Energy and Negentropic Organization, respectively. While
there is no way to measure these aggregate components, this conclusion keeps
reminding me that the economic system has to be fed from somewhere.

Totally agree. But don't forget the necessity not only of sources,
but also of sinks of high entropy stuff (garbage dumps, radiation
from the Earth into space). You could even think of Global Warming as
an economic problem at its heart.

These two
are the only "free lunch" around (with the possible exception of
borrowing against
Future Productivity), because once inside the aggregate system, it is simply a
matter of a recirculating flow.

Two countercirculating flows, if you like. One, of the organization
contributed by goods and services; the other, of money that serves as
a measure of the perceived organization. Both decay with time, if not
kept energised by the source and sink mentioned about. It's analogous
to a bathtub drain vortex, whose shape is maintained by the feedback
systems fed by the conversion of the potential energy of the water to
kinetic energy. As with the economy, the vortex looks like a stable
system in equilibrium, but it isn't.

5. I am not sure how time should be treated in the system I have spelled out.

Time is pretty critical if you are dealing with a system in which you
consider entropy. The further you go in either direction from the
present, the more uncertain things become, which changes their
present value to an individual. Macroscopically, it means there is an
inexorable requirement for inflation if the economy is to be stable,
as well as for deficit spending on average, whether by Government or
by individuals. If teh deficit spending is largely by individuals,
defaults increase in likelihood, increasing the uncertainty of the
future value of money, and increasing the inflation rate required for
stability. So it seem to fall to Governments to maintain an
approriate level of deficit on average, if the economy is not to wind
down into general distress.

Of course, the foregoing applies to a monetarily closed system. One
can always try to maintain a balanced budget on average and export
the misery to less fortunate places. That seems to be the preferred
option of the currently influential economists.

6. The result of conclusion #5 above, I believe, is that the equations should
probably be set up in terms of iterations, where the time factor is specified.
I believe this amounts to a shift - as Bill Powers discussed a while
back - from
algebra to calculus. Algebraic equations, if true, always hold
true, regardless
of conditions. Differential equations have to be solved for the same set of
conditions, where time is an integral part of the equations. And if
I understand
the math properly, integrative equations by means of successive
iterations can be
utilized to approximate the correct use of time in determining the results.

Probably correct.

I'll end with my semi-standard disclaimer. I don't know if it is
helpful to anyone
else, to boil things down to such basic factors - (what I am calling
the organizing
nodes of an aggregate system diagram).

Sure it is. Whatever structure you wind up with, you have to start
with one you can at least to some extent understand. You can build on
that. The hope is that the initial structure is robust so that the
elaborated structure doesn't become too rococo (rather like the
difference between the original UNIX and the original DOS or
Windows--the one led to a powerful and stable system of general
value, the other to a fragile unstable and dangerously baroque set of
insecure fragments). But this analogy also shows that it isn't always
the better structure that gets more generally accepted.

I finally realized, if I was going to get any further with understanding
this aggregate macro-economic territory, I had to start with a
simple enough map
that worked for me.

Exactly. Great going!

Martin